Arbitrum: A beginner's guide to the next-generation layer 2 for Ethereum

What is Arbitrum?

The transaction fee crisis on Ethereum (ETH) has hampered the exponential growth of the Ethereum blockchain. Arbitrum technology is one of the many possible solutions for the congestion and high fees on the Ethereum network. 

Transactions on Ethereum are implemented and executed via smart contracts, and a fee is required to reward the network participants that store such programmable contracts on their machines. 

The transaction fee increases when the number of users grows and more transactions are required to be processed by the network. Moreover, every miner in the Ethereum blockchain must simulate every step of a contract's execution, which is costly and drastically limits scalability. The Ethereum blockchain also mandates that every contract's code and data be made public unless there is a privacy overlay feature that has costs of its own.

Arbitrum intends to lower network congestion and transaction costs by offloading as much work and data storage as possible from Ethereum's mainnet or layer 1 (L1). Ed Felten, professor of computer science and public affairs at Princeton, co-founded Offchain Labs, the company behind Arbitrum, in 2018. The strategy of storing data off-chain used by the Arbitrum network is called the layer 2 (L2) scaling solution (built on top of the leading Ethereum network).

This article will answer various questions like what the Arbitum bridge is; whether Arbitrum is an L2 solution; how Arbitrum works; how you bridge ETH to Arbitrum and whether Arbitrum is good for Ethereum.

How does Arbitrum work?

The four roles in the Arbitrum ecosystem are played by verifiers, a virtual machine (VM), a key and a manager, as discussed below:

Arbitrum is based on a simple cryptocurrency design in which parties can implement a smart contract as a VM that encodes the contract's rules. VMs are programs that run on the Arbitrum Virtual Machine (AVM) Architecture.

A set of managers for a virtual machine is designated by the VM's designer. Any single honest manager can force the VM to behave according to the VM's code, thanks to the Arbitrum protocol. 

Parties with a stake in the outcome of the VM can choose someone they trust to do so on their behalf or act as managers directly. In practice, the natural set of managers for many contracts will be reasonably limited.

Instead of forcing every validator to replicate every VM's execution, the VM's state can be advanced at a far reduced cost to the verifiers by relying on managers. Verifiers only keep track of the hash of the VM's state, not the entire state. Managers are incentivized by Arbiturm to come to an out-of-band agreement on the working of the VM.

The verifiers will accept any state modification that is supported by all of the managers. If two managers disagree on what the VM will do despite incentives, the verifiers use a bisection technique to reduce the disagreement down to the execution of a single instruction and then one manager offers a simple proof of that one instruction. Moreover, both VMs and parties can send each other messages and currency.

When a manager makes a debatable remark and another manager challenges it, the bisection protocol begins. Both managers will have put money down in the form of a currency deposit.

When a DApp runs on the Arbitrum chain, you have the option of selecting your group of validators to perform the consensus process. This means that as compared to Ethereum (where each validator keeps track of all of the network's apps), the validator working on one app cannot interact with any other Arbitrum app. This localized technique necessitates less connection between nodes, resulting in the speedier processing of transactions.

Layer 2 scaling solutions on Ethereum

The existing architecture of the Ethereum blockchain is altered to develop layer 2 solutions on top of Ethereum with the sole purpose of reducing transaction fees and network congestion. 

Scalability changes on layer 1, like increasing the number of transactions approved, can hamper the decentralization and security elements of the Ethereum blockchain. Therefore, the Ethereum 2.0 mainnet will be introduced soon. However, in the short term, solutions like Optimistic Rollups and zero-knowledge(zk) Rollups are examples of layer 2 scaling solutions. Arbitrum is one such L2 expansion rollup (Optimistic Rollup) for Ethereum blockchain.

Optimistic Rollups assume that all new chain additions are genuine unless disputed within a week by a network user. ZK-Rollups use cryptographic proofs to validate each new block added to the network, removing the requirement for validators to be trusted. While zk-Rollup technology has the potential to be the finest layer 2 technology in the future, it is more complicated than Optimistic Rollups and requires additional research and development.

So, what projects are on Arbitrum? Among the most prominent projects on Arbitrum include Sushiswap, Curve, Abracadabra, AnySwap and Synapse. Additionally, Uniswap, one of the most popular decentralized exchanges (DEXs) on the Ethereum network, polled its governance token holders to see if they wanted the platform to be ported to Arbitrum One. 

The voters chose Arbitrum over Optimism whereas Uniswap had planned to use Optimism's layer 2 solution. However, Optimism's full launch was postponed, which permits Arbitrum to lead. Despite this, Uniswap has implemented Optimism as the governance vote was not final. Therefore, it may take longer for the platform to incorporate Arbitrum.

What is the Arbitrum bridge?

Users can use the Arbitrum Token Bridge to transfer ETH and ERC-20 Ethereum tokens to a layer 2 scaling solution called Arbitrum One. If you want to send a transaction using Arbitrum, just send it to one of EthBridge's Inbox contracts. 

On the Contrary, an Outbox contract accepts data from Arbitrum and adds it to the Ethereum blockchain for reverse interaction. Because all of EthBridge's inputs and outputs are publicly verifiable, Ethereum can identify and verify any off-chain activities.

You might wonder how to bridge your ETH tokens from L1 to L2. To do so, please follow the steps below. However, make sure your wallet, such as MetaMask or other wallets, has ETH on the Ethereum mainnet to bridge the assets.

The first step is to go to wardenswap.finance to add the “Arbitrum one” network, as follows:

Now, visit the bridge.arbitrum.io website to connect token assets. Ensure that your wallet is connected to the Ethereum mainnet and follow the steps below to bridge your ETH tokens:

But, is there an arbitrum token? Offchain Labs does not have or expect to produce an Arbitrum token, i.e., there isn't any native token of the Arbitrum platform. Arbitrum contracts can use any Ethereum-based cryptocurrency they like. It is because the company didn't want to make another token.

What gas does Arbitrum use?

Arbitrum uses ArbGas to keep track of the cost of execution on an Arbitrum chain. Every Arbitrum VM instruction has an ArbGas cost, and the cost of a calculation is the total of the ArbGas fees of the instructions in it compared to Ethereum's gas limit.

This means that there is no hard ArbGas limit for Arbitrum and it is much cheaper than the ETH gas fee. The fee is usually charged to compensate Arbitrum chain's validators for their expenses, though it is set to zero by default. 

Also, ArbGas is charged for proof-checking every instruction by the AVM. Therefore, it is important to ensure that the EthBridge will never exceed the L1 gas limit by estimating how much L1 gas the EthBridge will require. Furthermore, the estimation of the emulation time is critical for rollup chain throughput because it allows us to safely establish the chain's speed limit.

ArbGas is different from Ethereum gas in that it tries to estimate emulation on AVM, whereas Ethereum gas serves a similar function on Ethereum. Access to storage, for example, is extremely expensive on Ethereum since a storage right in Ethereum establishes an obligation for all Ethereum miners, perhaps in perpetuity.

How do you swap tokens on Arbitrum using the Uniswap Protocol?

As mentioned previously, the Arbitrum platform does not have a native token. However, you can swap your tokens (for instance, on the Uniswap protocol) by using the following steps:

• To begin, choose the tokens you want to swap. You may not be able to find the token of your choice at the moment, but the list will grow as additional projects connect their tokens to the network.

• Review the stated price after entering the desired input or output amount. Nonetheless, if this is your first time trading the token on Arbitrum using the Uniswap protocol, you'll need to approve the token first (a one-time action).

• Review your quoted price, route and slippage after pressing submit. 

• When you're ready, click confirm swap and wait a few seconds for the Arbitrum network to confirm your exchange! You may check the specifics of your transaction at arbiscan.io after submitting it, including the final token amounts and gas fees.

Arbitrum offers instant swaps at a lower transaction fee than Ethereum. However, on Arbitrum, your trade will only use Uniswap v3 liquidity pools; even if a better price is available on layer 1, your trade will not use layer 1 liquidity.

How to run your DApp on Arbitrum?

You will need the Arbitrum compiler, EthBridge, and a validator implementation to run your DApp on Arbitrum. All these software programs are open-source and available via Github from Offchain Labs.

To begin, use the Arbitrum compiler to compile your Solidity contracts. This results in the creation of an AVM. Then, choose a group of validators to keep track of your VM's execution and ensure that it is right. 

A validator can be anyone, and each VM builder gets to pick its own validators. You can also appoint some observers who will view what your VM is doing but they will not be responsible for guaranteeing accuracy as is the case for validators.

Arbitrum offers the AnyTrust Guarantee, which states that your VM will run correctly as long as even one of its validators is online and operating honestly. When you're ready, you call EthBridge and instruct it to run your VM on Arbitrum as well as identify the VM's validators. On Arbitrum, your VM is now up and running. 

Users of your DApp will be able to use their browsers to access your existing front-end interface. Through behind-the-scenes messaging with your validators, the front-end will automatically communicate with the running VM. By depositing funds into your Arbitrum wallet, your users can make calls to VM, send ETH or other Ethereum-based tokens to the VM.

Arbitrum vs. Optimism: How do they compare?

Abritrum and Optimism are similar because they are only deployed when faulty blocks are identified rather than with every transaction. Cross-chain bridges exist on both networks, allowing tokens to flow between layer 1 and layer 2.

Instead of going through a sequence of confirmations, the transactions are confirmed after the block is created. Once again, this results in a network with low latency and great throughput.

The networks are different in various ways, as shown in the table below:

The future of Arbitrum

Early L1s like Ethereum and Bitcoin valued decentralization and security over scalability, as seen by high gas fees on both platforms. However, Arbitrum aims to solve this blockchain trilemma by implementing Optimistic Rollups that satisfy all these three elements.

However, the Ethereum community believes that the longer-term comprehensive solution involves the implementation of zk-Rollup. Being the most advanced L2 platform, Arbitrum will hopefully continue to absorb the current technology trends to scale the platform and promote its expansion.